(The following statement was released by the rating agency)
Oct 12 - =============================================================================== Summary analysis -- Groupe Auchan S.A. ---------------------------- 12-Oct-2012 =============================================================================== CREDIT RATING: A/Stable/A-1 Country: France Primary SIC: Miscellaneous retail stores, nec =============================================================================== Credit Rating History: Local currency Foreign currency 30-Jun-2003 A/A-1 A/A-1 05-Nov-2002 --/A-1 --/A-1 =============================================================================== Rationale
The ratings on French food retailer Groupe Auchan S.A. reflect Standard & Poor's Ratings Services' view of the group's strong business risk profile, underpinned by its well-established positions in regulated European markets, its expertise in the hypermarket format, and its modest financial risk profile.
Auchan's key business strengths include its No. 4 domestic market position, with a market share of about 12%. The company benefits from wide recognition of the Auchan banner in its home market, thanks to its almost nationwide coverage. Our assessment of the business risk profile also factors in the company's good geographic diversity, with well-entrenched positions in Asia and Eastern Europe. On the downside, the group relies heavily on the hypermarket format, which generates about two-thirds of its EBITDA, and is materially exposed to Southern European markets.
Our view of Auchan's financial risk profile as modest relies on financial metrics that we consider adequate for the current ratings, specifically funds from operations (FFO) to debt of 41% and debt to EBITDA of 1.9x at year-end 2011. We also take into account the group's recent acquisition of 49% of the real estate company Gallerie Commerciali Italia SpA (GCI). We view the group's financial policy as moderate, and consider that management demonstrates willingness to maintain adequate financial flexibility.
S&P base-case operating scenario
We anticipate that Auchan's current strategy will help it to maintain its market positions and limit eroding profitability. Considering the current highly competitive environment, Auchan's focus on volume generation is sensible, in our opinion. Our view that the group will likely maintain its market share in its home market, thanks to its positive price image and to its continued rollout of the Drive concept (customers order online and drive to the outlet to collect purchased items), underpins our assessment of the business risk profile.
In our base-case scenario, we foresee mid-single-digit growth in revenues over the next 12 months, on the back of increasing trading space and growing international operations. We believe that Auchan's adjusted EBITDA margin will narrow by 10 basis points (bps) in 2012, after losing 50 bp in 2011, because competition remains stiff and the growing number of government austerity measures rolled out in Western Europe is constraining consumers' disposable income.
In our opinion, Auchan's real estate ownership and development activities at its subsidiary, Immochan (not rated), are a diversifying and strategically supportive factor for the group. Immochan contributed enhanced consolidated profitability in 2011, reporting an EBIT margin of 48% for the year.
S&P base-case cash flow and capital-structure scenario
Auchan's disciplined financial policy, supported by the financial flexibility it derives from its real estate ownership, should enable the group to sustain a financial profile commensurate with the current ratings. Despite our forecast of additional erosion in profitability this year, we believe that Auchan will maintain robust credit metrics in 2012, namely adjusted FFO to debt in the 35%-40% area and debt to EBITDA at about 2.0x. Although these ratios may slightly deteriorate subsequently, we believe they will likely remain at satisfactory levels for the current ratings.
Our base-case scenario now factors in a moderate increase in capital expenditures (capex), which we understand will rise to roughly 4% of revenues on a gross basis over the next two years, owing to Auchan's expansion in emerging markets. However, we believe that the company is ready to curtail this cash outflow in case of deteriorating performances or if it is unable to divest assets, in line with its track record of prudent financial policy. We also anticipate that shareholder remuneration will remain limited, in line with previous years.
The short-term rating on Groupe Auchan S.A. and Auchan Coordination Services S.A. is 'A-1'. We view Auchan's liquidity as "adequate" under our criteria and calculate that liquidity sources will likely exceed liquidity needs by more than 1.2x over the next 12 months.
As of June 30, 2012, we estimate liquidity sources of around EUR5.4 billion. These include:
-- EUR1.6 billion of surplus cash, excluding EUR300 million we consider to be tied to operations;
-- EUR2.0 billion of undrawn credit lines, of which EUR0.8 billion mature in 2014 and EUR1 billion in 2015; and
-- EUR1.8 billion of reported FFO forecast over the next 12 months.
We estimate Auchan's liquidity needs over the next 12 months to be about EUR4.2 billion, comprising:
-- EUR2.3 billion of short-term debt, excluding the debt related to banking activities;
-- EUR1.8 billion of capex; and -- EUR0.2 billion of dividends.
Some credit lines bear a financial covenant (debt to EBITDA of maximum 3.5x), but Auchan has significant headroom (the ratio was 0.9x in December 2011). We consider Auchan's liquidity to be sufficient to cover its reported consolidated short-term debt of EUR3.7 billion on June 30, 2012, including that at captive finance subsidiary Banque Accord (A/Stable/A-1).
The stable outlook reflects our view that Auchan will slightly increase its EBITDA generation and at least stabilize its market shares in 2012. We also believe that Auchan will maintain a balanced financial policy, which implies that it will adjust its capex program to its operating environment and the actual proceeds of asset divestments. We view an FFO-to-debt ratio of 30%-35% and a debt-to-EBITDA ratio of 2.0x-2.5x as commensurate with the current ratings.
We could lower the ratings on Auchan if, despite increasing capex, EBITDA growth fails to materialize, for instance because of an erosion in market share or substantial pricing pressure. We would also consider a downgrade if the group is unable to maintain credit ratios in line with our guidelines for the current ratings. Such a possibility would arise in the event of higher-than-anticipated capex, a large debt-financed acquisition, or shareholder payouts exceeding our current expectations.
Rating upside would hinge on a recovery in Western European markets, Auchan's enhanced geographic diversity, and a stabilization of credit metrics at 2011 levels. Such an outcome appears remote to us for the moment.
Related Criteria And Research
-- Methodology: Business Risk/Financial Risk Matrix Expanded, Sept. 18, 2012
-- Methodology And Assumptions: Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011
-- Key Credit Factors: Business And Financial Risks In The Retail Industry, Sept. 18, 2008
-- 2008 Corporate Criteria: Ratios And Adjustments, April 15, 2008 -- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008